Reserve Bank of India (RBI)
•RBI was constituted under the RBI Act 1934 and started on 01.04.1935. •
•Control of RBI vests with the Central Board of Directors, that comprises –the Governor, –Four Deputy Governors and –12 Directors and –4 others- one each from local board.
Main objectives of monetary policy in India are: 1.Maintaining price stability 2.Ensuring adequate flow of credit to support economic growth. 3.Financial Stability
Instruments in the formulations and implementation of monetary policy:
A. Direct Instruments:
1.Cash Reserve Ratio (CRR):(4%) –Quantum of cash that banks are required to keep with RBI as a proportion of their NDTL. –No floor or ceiling rate. –No interest on CRR balances. –Daily maintenance of CRR 90% of total CRR requirement. (Sec 42 (1) of RBI act 1934) ●
2.Statutory Liquidity Ratio (SLR):(19.25%): –Share of NDTL in Cash/Gold/Specified Govt. Securities. ●
Penalties for non maintenance of CRR and SLR: –1st day Bank rate + 3%, – succeeding day/s: Bank rate + 5%.
3. Sector Specific Refinance Facilities to banks.
B. Indirect Instruments:
1.Liquidity Adjustment Facility (LAF): Manage liquidity on a repurchase basis, through
Repo (Liquidity injection) and reverse repo (liquidity absorption) auction operations, using Govt. securities as collateral. Under LAF – Repo rate, Banks can borrow from RBI at the Repo rate by pledging Govt Securities over and above the SLR requirement. ●
2.Repo/Reverse Repo Rate: Determine the corridor for short term money market interest rates. (Repo rate: 6.00%, Reverse Repo rate: 5.75%) ●
3.Open Market Operations (OMO): In addition to LAF, as a tool to determine the level of liquidity over the medium term. ● 4.Marginal Standing Facility (MSF): (6.25%) SCBs can borrow (even by dipping into SLR portfolio) over night upto 2% of their NDTL at 100 bps above the repo rate, against approved Govt Securities. Size Rs one Crore and multiples of Rs one crore thereafter. ●
5.Bank Rate): (6.25%) RBI is ready to buy or rediscount BOEs or other CPs. ●
6.Market Stabilisation Scheme (MSS): Issuing of T. Bills and dated securities over and above the normal borrowing programme of GOI for absorbing excess liquidity.
•Issuer of Currency
•RBI has authority to issue notes up to value of Rs 10000. • •Notes in circulation Rs 2, 10, 20, 50, 100, 200, 500 and 2000. (Issued by RBI) • •Coins in circulation 50 paisa, 1. 2. 5 and 10 rupee. • •one rupee note and coins are issued by Central Government • •Rupee coins can be used to pay for any sum where as paisa 50 coin can be used to pay any sum up to Rs 10.
Banker to Govt.
•RBI maintains Central & State Govt’s accounts, receives money into and make payments out of these accounts and facilitates transfer of govt. funds. •
• RBI acts as the banker to those state Governments that have entered into an agreement with it. •
•If the balance shows a negative position, RBI extends a short term, interest bearing advance, called Ways and Means Advance (WMA). The limit is set at the beginning of each FY in April
Banker to Banks
clearing and settlement of inter bank obligations. ●
2. Providing an efficient means of funds transfer for banks. ●
3. Enabling banks to maintain their accounts for CRR requirement. ●
4. Acting as lender of the last Resort for banks which are unable to raise short term resources from the inter bank market. –Critical function as it protects interest of depositors and stabilizing impact on the financial system and on the economy as a whole.
Regulator of the Banking System
•RBI ensures safety and soundness of the banking system and maintaining financial stability and public confidence in this system. RBI oversees: 1.Commercial and all India Development Financial Institutions. 2.Urban Cooperative Banks. 3.RRBs, District Central Cooperative banks and State Cooperative Banks. 4.NBFCs ●
The RBI’s Regulatory Role includes: –Licensing,
– capital requirements,
– solvency , liquidity, & priority sectors norms –Regulating interest rates in specific areas,
– norms relating NPA, investment valuation, exposure limits etc.
On site inspections, off site surveillance, making use of required reporting and periodic meetings.
Corporate Governance: –RBI ensures high quality corporate governance in banks. –Fit and proper criteria for directors of banks. –Majority of directors to have special knowledge or practical experience.
Manager of Foreign Exchange
•RBI – administration of FEMA, 1999. •
•Regulation and development foreign exchange market – role: a.Regulating – external sector & b. Domestic foreign exchange market. c.Managing Foreign Currency(FC) assets and gold reserves of the country. •
•RBI’s Financial Markets Department (FMD) participate in the Forex Market by undertaking sales/purchases of FC to ease volatility in periods of excess demand for/supply of FC.
Regulator & Supervisor of Payment & Settlement Systems
•The Payment and Settlement System Act 2007 gives RBI authority for the payment and settlement •Most payment and settlement activities operate on the security platform of the INdian FInancial NETwork(INFINET), using digital signatures for further security of transactions.
a.Retail Payment System: –Facilitating cheque Clearing, –Electronic Fund Transfer through NEFT, –Settlement of card payments and –bulk payments such as ECS. ATM, IMPS.
b.Large Value System: –RTGS, –Securities Settlement System for the Govt Securities market, –FOREX clearing for transactions involving foreign exchange.
•Ensuring credit availability to the productive sectors
Over the year, RBI has added new institutions :
2.UTI (1964), the 1st mutual fund of the country.
3.NABARD (1982) for promoting rural and agriculture credit.
4.Discount and Finance House of India (DFHI)(1988) a money market intermediary and a primary dealer in Govt. Secretaries. 5.NHB(1989) an apex FI for promoting and regulating housing finance.
6.Securities and Trading Corporation of India (1994) a primary dealer. ●
•Directed credit to PS: Agriculture, MSE, affordable housing & education loans.
•Lead Bank Scheme:. •Sector Specific refinance: i.e. export sector.
•Strengthening and supporting RRBs and Cooperative Banks
•Financial Inclusion –Expanding affordable financial services & –promoting financial education & literacy
Regulatory Restrictions on lending
1.No advance against security own share/partly paid up shares of a company. 2.No bank can hold share of a company:
(a) as a pledgee/mortgagee in excess of 30% of paid up capital of that company or 30% of Bank’s Paid up capital & Reserves, whichever is less.
(b) In the management of which MD or Manager of the bank is interested.
3. Bank’s aggregate investment in shares, CDs, Bonds etc should not exceed 40% of Bank’s net owned fund as at the end of the previous year. 4.No bank should grant loan against CDs & IDR(Indian Depository Receipts.) 5.Banks should desist loans against FDs issued by other banks. 6.Bank should adhere RBI guidelines for loans against commodities covered under Selective Credit Control. 7.No loan can be granted by banks to: (a) Bank’s directors or firms in which director is interested. (b) Relatives of other bank’s directors. •Such loans can be sanctioned by the Board of bank.
8. No additional facilities should be granted to the listed willful defaulters.
9. RBI has prescribed exposure ceiling 15% of capital funds in case of a single borrower and 40% of capital funds in the case of a borrower group.
Inclusion of UCBs in 2nd schedule of RBI
w.e.f. 01.04.2013 financial criteria which need to be satisfied for inclusion in 2nd schedule of RBI are as under: 1.DTL of not less than Rs 750 crore on a continuous basis for one year. 2.CRAR of minimum 12% 3.Continuous net profit for the previous three years. 4.Gross NPAs not exceeding 5%. 5.Compliance with CRR/SLR requirement and 6.No major regulatory and supervisory concern.
This is all about Unit-02 of Principle and Practice of Banking . I hope you easily understand this unit.
Best wishes for Exam.